Can Health Care Reform Possibly Control Costs?

President Obama and his supporters have high hopes for health care reform. One of the most central goals of their plan is the reduction of long-term costs in the system, a much-needed change. But despite the promises and theoretical projections, it's not clear how those reductions will be accomplished. And the considerable power of the health care industry, which will remain in full force even with reform, may make those cost savings difficult if not impossible to achieve.

Part of the problem of health care reform is the nature of America's health care industry. At least to some observers, it's more of a cartel than a competitive marketplace. The health care industry is a highly profitable and politically powerful group of companies that operate in cartel-like fashion, using their clout to limit competition and establish highly profitable pricing.

Health care operates as a "cartel" not in the sense of a formal organization like OPEC (the Organization of the Petroleum Exporting Countries) or the criminal activities of drug cartels, but in the informal sense of a small group of companies that dominate specific markets and thus wield significant political and pricing power within those markets.

The health care reform bill does little to challenge this power. Indeed, it's a sign of the medical industry's enormous political power that the bill overlooked some of the biggest reasons for the high cost of American medicine.

When asked to identify the source of America's runaway health care costs, health care industries and trade groups excel at pointing to the next guy as the source. Doctors, hospitals, insurers, HMOs, pharmaceutical companies, malpractice lawsuits and the courts that award huge settlements, federal regulatory agencies, Medicare -- scapegoats abound, and so do rationalizations.

If no one group is responsible, then perhaps we need to look at the entire system of self-serving industries. The system profits from guaranteed payments to private-sector companies and is protected by special political dispensations. It's based on regional networks of providers negotiating with insurers to exclude competitors and set exorbitant prices that are passed on as insurance premiums. While insurers complain about rising costs, they're exempt from antitrust laws and thus have the power to consolidate smaller insurers within a region and then pass on price increases to consumers and businesses alike.

And if the health care reform bill doesn't really address the cost generators and the incentives built into the current system, then it's difficult to see how costs can decline.

A recent report by Massachusetts Attorney General Martha Coakley uncovered multiple forms of anti-competitive behavior among providers, including huge price disparities that had no visible relation to any free-market factors. The report concluded that this and other forms of collusive behavior were "pervasive."

Monopoly Pricing, Wasteful Spending

Once upon a time in U.S. health care, it was the norm to post prices for procedures and care. This hospital price sheet is from the 1950s. According to the Coakley report, this is no longer the norm.

Some local providers who post their prices openly, such as Keith Smith, an anesthesiologist with the Oklahoma Surgery Center, find that preferred provider organizations (PPOs) and insurance companies aren't interested in contracting with his group, even though their prices are 70% less than those charged by local not-for-profit hospitals. To Smith, that's strong evidence that medical cartels are making deals with insurers to monopolize services in their region.

While proponents are quick to note that scans are cheaper than the alternative diagnostic procedures, one firm's research found that a doctor who owns his own machine is four times as likely to order a scan as a doctor who doesn't.

The heart of the health care reform bill's cost-saving strategy is called "comparative effectiveness research," which attempts to lower costs by establishing the most effective treatments via statistics-driven methodologies. The standard example is such studies might prove that cheaper generic drugs work as well in clinical trials as branded drugs.

The corporations which make gastric bands for the surgery are pushing for the Food and Drug Administration (FDA) to allow their use on teens as young as 14, which would open up a new market of 2 million prospective patients. If the devices and surgery are approved, then government programs such as Medicaid might be asked to approve payments for the procedure as the "most effective available" treatment for teen obesity.

The problem with claims about effectiveness is that there is little data which shows gastric surgery is effective in the long-term for either adults or teens, according to Dr. Edward Livingston of the University of Texas Southwestern Medical Center. Livingston, who has been performing gastric surgeries on adults for the past 17 years, reported that many patients regain weight after the surgery if their lifestyles haven't changed. The goal, he said, should be a public health approach that makes surgery unnecessary.

This is called "choice architecture" in the social sciences: establishing conditions which enable better choices. Examples include banning snack machines and eating in school hallways, making city centers more walkable and offering healthier choices on restaurant menus. Such modest changes resulted in a 32% reduction in one city's employees' health claims in just 10 months.

Dr. Willett offered a handful of common-sense national policy changes, including subsidizing whole grains, fruits and vegetables in the food-stamp program; setting targets for salt reduction; incorporating physical education into No Child Left Behind; and requiring that sidewalks and bike lanes be part of every federally funded road project

But who will push for these changes when the alternative treatments such as surgery are worth hundreds of millions of dollars in new revenues for medical device makers and providers? If the incentives built into the current system aren't changed, then the reform bill's promises of cost-reduction may well turn out to be hollow.